Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297382 
Year of Publication: 
2022
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2022-50
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation post-COVID-19. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that central banks face a more severe trade-off between inflation and output stabilization when inflation is high.
Subjects: 
Business fluctuations and cycles
Central bank research
Coronavirus disease (COVID-19)
Economic models
Inflation and prices
Inflation
costs and benefits
Monetary policy
Monetary policy implementation
JEL: 
E30
E31
E32
E37
E44
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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